Armchair Millionaire Community Bulletin: Shopping for a Mortgage -Don't Borrow Trouble

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Don't gamble with your home. If real estate prices go up, great. But don't bet the house on it by getting an outsize mortgage that you can ill afford.

There's been a sharp increase in home prices nationwide over the past few years. According to government statistics, house prices rose 11.2 percent in 2004, the fastest clip in 25 years. In some hot markets such as New York and Boston, values have increased even more.

With so many homeowners seemingly making easy money just by making their monthly mortgage payments, it's easy to get caught up in the excitement. A dose of reality from the Armchair Millionaire community might bring you back down to earth:

"I do believe real estate values will start to go down slightly, especially as interest rates starts to creep up. I don't think the values will fall sharply. But for people who put very little to no money down who need to sell soon may find it difficult get break even." --Mattchiavo

"I believe that there will be a burst in the bubble of real estate prices, but not a huge one. I think people are buying up property and houses at higher prices than they should, thinking it's a good investment. Those who invest in real estate wisely will not lose money, but they may not gain what they thought they were going to." --Ben

"Real estate values all depend on where you live. I have been trying to sell a home in rural area since May 2004, and have yet to get an offer that will pay off just what I owe on the house. So I would say real estate is a terrible investment." --Vickie

Managing your mortgage wisely is one of the most important financial skills you should have. My guide provides the basics of what you need to know.

The Armchair Millionaire's Guide to Smart Mortgage Borrowing

Be realistic about what you can afford. If you're paying $1,000 for your rent or mortgage now--and just making ends meet--don't kid yourself about suddenly being able to make $1,500 payments. Your home will be on the line, so if a new mortgage means higher payments make absolutely certain that you're comfortable with that increased cost.

Get your mortgage before you go house hunting. Get pre-approved (not just pre-qualified) for your mortgage before you even start browsing the real estate ads. You'll know exactly what you can afford, and won't be tempted to push the financing envelop just because you fell in love with a house that beyond your means.

Watch your debt/income ratio. As a general rule of thumb, your total monthly debt obligations--mortgage payments, car loans, credit card payments and the like--should be no more than 36 percent of your gross monthly income. Some lenders may let you exceed this ratio, but that doesn't always mean that it's a good idea to do so.

Be cautious with adjustable-rate mortgages. ARMs are attractive because they offer a lower interest rate than fixed-rate mortgages. The catch is that their rates shift along with prevailing interest rates. This means that you can't assume that those low rates--and corresponding lower monthly payments--will last forever. To be on the safe side, only get an ARM if you know you'll be able to pay the maximum payment to which it might rise.

Be even more cautious with interest-only mortgages. These loans require you to pay only the interest on your loan for a fixed period, typically five years. People often use them to buy homes that they otherwise could not afford, and they have two distinct disadvantages. First, you build no equity in your home over the interest-only period. Second, once that period is up, your monthly payments jump considerably to cover both interest and principal. This may not be a problem if you're sure you'll sell the home before that interest-only period has elapsed, but otherwise it could make your payments suddenly unaffordable.

The Bottom Line: Don't gamble with your home. If real estate prices go up, great. But don't bet the house on it by getting an outsize mortgage that you can ill afford.

The Armchair Millionaire Weekly Survey: Do you think you've got the right insurance for your house or apartment? Log on to and let us know.

Lewis Schiff founded the Armchair Millionaire Web site in 1997. His first book, The Armchair Millionaire, was published in 2001. Schiff's newest report, "How to Know When You Are Rich," is now available at

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Lewis Schiff

Armchair Millionaire


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Lewis Schiff